SEC finally backs public advertising for private placements

The Securities and Exchange Commission on Wednesday voted to propose rules that would allow issuers of private securities such as hedge funds to advertise their offerings and make solicitations to the public. The rule change is mandated under the Jumpstart Our Business Startups Act. Solicitation and advertising of private offerings, which would include the posting of information about deals on websites, would be allowed only when the product is sold to accredited investors. The rule proposal, however, did not specify what methods issuers must use to ensure they sell only to accredited investors. Such verification methods “would be impractical and potentially ineffective," the SEC staff said in a release. Instead, the regulator is proposing that issuers consider the type of purchaser and what they know about them, how the investor was solicited and the terms of the offering, such as minimum investment. Observers have been debating exactly how such verifications should work. Issuers have been urging the SEC to allow them to continue using signed statements from investors who claim they meet accreditation standards. State securities regulators are pushing the agency to require substantiation of financial status, such as tax and income records. The commission had planned last week to implement immediately effective rules allowing solicitation of private products, but Chairman Mary Schapiro backtracked on that idea after state regulators and investor groups complained about not having the normal 30-day comment period to air their views. That change of heart caused friction among the commissioners. Troy Paredes and Daniel Gallagher, both Republican appointees, expressed frustration that an immediate rule did not go into effect Aug. 22. For her part, Ms. Schapiro defended including the 30-day comment period. "When serious commentators raised concerns about not having an opportunity to comment … it was my view it would be wrong not to give them that opportunity to be heard," Ms. Schapiro said at today's meeting. "They had something concrete and specific and real to offer to the commission and to not give a brief comment period in order to do that, in my view, is the wrong approach,” she said. “We needed to make a course correction and we have done so, and I think it's the right approach." Under Section 501 of SEC Regulation D, to be an accredited investor, a person must have an individual net worth, or joint net worth with a spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person. Alternatively, a person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years may be considered accredited.